Credit Cards 101

How do I start to establish credit?
There are some positive steps you can take to build or establish your credit history:

1. Open a bank account – savings or checking.
2. Apply for a charge or credit card. Try to get a department store or gas charge card (ones without a Mastercard or Visa logo on the card); these are easier to get than a bank Mastercard or Visa card at first.
3. Charge some purchases you know you can afford and make payments on time.
4. After a period of time of making payments, say three months or more, apply for a Mastercard or Visa. Check our credit card offers to see which is the best credit card for you.
5. Don’t give up if it doesn’t work the first time! It takes time to build a credit history. Just keep paying on time and apply for a credit card again.
6. If you have trouble qualifying for a charge or credit card, you may want to apply for a secured credit card. These cards have credit limits based on a required deposit made by you into a savings account. You can use the card just as you would any other kind of credit card.

What is a credit card?
A credit card is typically a small wallet-sized plastic card that allows the owner to charge purchases or services to an account and pay them back over time. Simply, the user is taking out a loan from the issuing credit card company or bank. There are many types of credit cards: student credit cards, rewards credit cards, secured credit cards, business credit cards, balance transfer credit cards, and more. The front of the card generally has the name of the card, the account number, and the owner’s name and the dates through which the card is valid. The back of the card has coded magnetic strip and a place for the owner to sign the card.

What’s the difference between a credit card and debit card?
A debit card is linked directly to your bank checking or savings account. When you make a purchase with a debit card, it automatically takes the purchase amount out of your account. Generally, a credit card is not linked to your accounts (unless it is a secured credit card). Credit cards are usually unsecured credit, meaning they are not attached to an account of any kind. The credit card company is allowing you to borrow with nothing to back it up except your good credit rating, with the understanding that you will pay the credit card debt back in a timely manner. Sometimes a debit card will have a Mastercard or Visa logo on it. This is a special kind of debit card, but it is still not a credit card, and any charges you make using the debit card will be taken from your bank account. Note that you might need to have a credit card in order to make hotel, car and airline reservations.

What’s the difference between a credit card and charge card?
A charge card and credit card may look similar but have at least one important difference: you must pay off your charge card in full every month. Generally speaking, a credit card allows you to pay off only part of your balance at a time and a charge card does not. Because you are not carrying a balance, you will not see a periodic or annual percentage rate (APR) on your charge card statement. You should be aware that you might be charged other fees for the use of your charge card such as annual or transaction fees. Always know what kind of card you have and what you are being charged for owning and using it.

How do credit cards work?
When you make a purchase using a credit card (for example, a Visa card), the vendor swipes your card through a machine that “reads” the magnetic stripe on the back of the card, then enters the purchase amount on the machine’s keypad. The machine calls the Visa computers which in turn call the bank that gave you the card. The bank makes sure the account is active and that the card has not been reported as stolen, and that the transaction is not over your credit limit. You then sign the credit slip and leave the store with your purchase. Every month (or billing cycle) the credit card company sends you a bill (called a statement) that shows the total amount of purchases you have made using your credit card. It is your responsibility to pay them back, either in full or in increments over time. If you choose to make only the minimum payment, or only a portion of the bill, you will be charged interest on the balance (amount you don’t pay).

What fees do credit cards charge?
Along with the ease of use of credit cards come certain fees and charges. Most credit card companies charge for the following:

• Annual fee
• Cash advance fee
• Balance transfer fee
• Late payment fee
• Over the limit fee

• Wire transfer fee
• Stop payment fee
• Credit limit increase fee
• Setup fee
• Return item fee
• Pay by telephone fee

Are there risks of owning a credit card?
Yes, having a credit card carries with it some financial risk. For example, if your credit card is lost or stolen and then is used by someone else, you will have to pay the first $50 of the charges the other person made without your permission. Perhaps more important though, are the charges you make yourself using the credit card. You will be responsible for paying for all charges on the card according to the Terms and Conditions on the card. In some cases, you will be charged an annual fee even if you do not use the card. If you carry a large balance on your credit card, you are responsible for paying the balance and any finance charges, and if you do not follow the terms and pay at least the minimum payment on time, it can negatively affect your credit history. If your card is lost or stolen, report it immediately to your credit card company by calling the toll-free number listed on your statement. The company will cancel the card so that new purchases cannot be made with it and will issue you a new card.

Are there special benefits of owning a credit card?
Many credit card companies offer special features, rewards or discounts to attract new customers. Rewards offered include rebates, frequent flyer miles, phone call minutes, and others. Some of the other kinds of benefits that credit card companies offer include:

• Purchase Protection - Insurance for purchases up to a set value (if you buy something on your card and want your money back, you might be able to claim the amount from the credit card company)
• Warranty coverage - Coverage for warranties (free or discounted repair or replacement) for purchases, and in some cases, extended warranties
• Car rental insurance - Damage and collision-waver insurance for your car rental that can be used to supplement, or in some cases used instead of, your personal car insurance coverage
• Travel accident insurance or other travel-related discounts - Insurance for accidents while traveling, trip cancellation, roadside assistance, lost or damaged luggage and more
• Payment Protection - Insurance to cover payments on your credit card balance (if you become unemployed or disabled, or die)
• Credit card registration/insurance - Registration of credit cards or insurance to cover the first $50 of charges if your card is lost or stolen

What are the terms and conditions when applying for a credit card?
You can find the Terms and Conditions listed on the back of your monthly statement. You can also call your credit card company and ask them. When you apply for a credit card or charge card, the credit card company must inform you of the following:

• The annual percentage rate (APR) for purchases made on credit.
• How the APR is determined if it is a variable APR or a regular APR.
• The method the issuer uses to calculate finance charges and the amount of any minimum finance charge.
• Fees for purchases, cash advances, late payments, or going over the credit limit.
• The annual fee that you will be charged if there is one.
• When charges are due and payable.
• How many credit cards should I have?

What is an introductory period?
The introductory period is the time during which the introductory APR (low rate used to attract new users) is effective. It is often a few months to a year, but it varies for each card. Always be sure you understand how the APR is calculated, and what it will be, when the introductory period is over. If you are planning to pay off the balance before the introductory period is over, then credit cards with an introductory 0 APR or low APR can actually save you money in the end. However, if you want to own a credit card for an extended period of time then a fixed low interest credit card might work better for you.

What is a minimum payment?
Almost all credit cards have a minimum payment that is a percentage of your current balance. The calculation of this payment varies from card to card and in many cases, is limited by federal and state rules. The minimum payment is a very crucial number, because it is the smallest payment you can make in a billing cycle to keep your account from being unpaid (“in default”). If you carry a balance over time, you should expect the minimum payment to go up each month, sometimes by a lot. Whenever possible, try to pay off your credit card debt paid in full or pay as much as you can. Otherwise, you can end up paying a lot more than the original cost of your purchase.

What is a prepaid credit card?
A prepaid credit card looks like a credit card, and is accepted everywhere credit cards are, but it is not a credit card. Like a prepaid phone card or cash/gift card, the prepaid credit card has a set amount that has been loaded onto the card. When your prepaid credit card is “read” by a special card reader, you can use up the amount on the card by increments or all at once. Note that prepaid credit card fees change often – be sure to read the Terms and Conditions for your card very carefully before you use it.

What is a balance transfer?
First, be sure that you are moving your balance to the best credit card for the job. Not all balance transfer credit cards are created equally, you must compare them side-by-side to see which one is the best for your financial needs. Balance transfer credit card offers come frequently in the mail, especially if you carry balances often. To see the best balance transfer credit cards, see our Balance Transfer Cards page, and simply click “Apply” for the card you like the best. You will be taken to a secure online credit card application page and will be asked basic information about your income, where you live, and your job. Always ask these questions for any balance transfer credit card offer:

• What are the transfer fees, if any?
• What is the APR after the introductory rate is over?
• Is the low/0% APR for transfers and purchases, too?
• What is the annual fee?
• What are the other fees – late fees, over the limit fees, etc. ?